Experiential Learning, Competitive Selection, and Downside Risk: A New Perspective on Managerial Risk Taking

Johannes G. Jaspersen () and Richard Peter ()
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Johannes G. Jaspersen: Institute for Risk Management and Insurance, Ludwig-Maximilians-Universität München, 80539 Munich, Germany
Richard Peter: Department of Finance, Henry B. Tippie College of Business, University of Iowa, Iowa City, Iowa 52242

Organization Science, 2017, vol. 28, issue 5, 915-930

Abstract: It is part of managerial wisdom that managers need to take risks in order to succeed. This is in stark contrast to the prominent agent-based theories of experiential learning and competitive selection that are known to be biased against risky alternatives in the long run. How can the positive managerial view on risk taking prevail given these results? Qualitative surveys of managers suggest risks to be acceptable if their outcome distribution meets certain criteria. We argue in this paper that these criteria are widely congruent with low downside risk. Using a novel simulation design, we analyze the effects of experiential learning and competitive selection on downside risk preferences in an ecology of agents. In the long run, experiential learning implies weak downside risk seeking, whereas competitive selection leads to strong downside risk aversion. Furthermore, competitive selection leads to the prevalence of outcome distributions with low downside risk in an ecology, even if they have a significantly higher level of total risk than comparable distributions with more downside risk. We draw implications for empirical studies on managerial behavior.

Keywords: experiential learning; competitive selection; decision making in organizations; ownside risk; managerial risk taking (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (3)

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